Exam question and answer

bank

461
 EXAM QUEST ION BAN K
.......... .. ..........

1 Which of the following are true of sole traders?

(1) A sole traders' financial statements are private; a company’s financial statements are sent
to shareholders and may be publicly filed
(2) Only companies, and not sole traders, have capital invested into the business
(3) A sole trader is fully and personally liable for any losses that the business might make; a
company’s shareholders are not personally liable tor any losses that the company might make.
A 1 and 2 only
B 2 and 3 only
C I and 3 only
D 1, 2 and 3
t2 marks)
2 Who is responsible for the preparation of the financial statements of a company?
(1) The finance department
(2) The board of directors
(3) The external auditors

A I only
B 1 and 2 only
C 2 only
D 1, 2 and 3
(2 marks)
3 Which TWO of the following are advantages of trading as a partnership?
(I) Additional capital can be raised because more people are investing in the business.
(2) A partnership has a separate legal identity from the individual partners.
t3) Partners have limited liability and are not personally liable for the debts of the partnership
f4) A partnership iS not required to make its financial accounts publicly available.
A and 2
B 1 and 4
C 2 and 4
D 2 and 3
(2 marks)
4 Which TWO of the following are disadvantages of trading as a limited liability company?
(I) The shareholders of the company have limited liability for the debts of the company.
(2) A company must publish annual financial statements.
(3) Raising finance is easier as a company as more shares can be issued.
(4) The financial statements of larger limited liability companies must be audited.
A I and 2
B I and 4
C 2 and 3
D 2 and 4
(2 marks)
5 What should be the main aim for a director of a company?
A To manage the affairs of the company in order to earn a good
bonus
B To manage the affairs of the company in order to create wealth for the
shareholders C To manage the affairs of the company in order to generate the
largest profits in the
shortest time
D To manage the affairs of the company in order to contribute to the general well being of society
(2 marks)
463
6 What is the role of the IFRS Interpretations Committee?
A To develop and issue a set of globally accepted international financial reporting
standards B To clarify issues in the application of IERSs where unsatisfactory or
conflicting
interpretations have developed
C To take account of the financial reporting needs of small and medium sized entities
D To provide a forum for the IASB to consult with the national accounting standard setters,
academics and other interested parties
t2 marks)
7 Which of the following is responsible for developing and issuing lFRSs flnternational
Financial Reporting Standards)?
A IFRS Foundation
B IFRS Interpretations Committee
C International Accounting Standards Board (IASB)
D IFRS Advisory Council
(2 marks)
8 The IASB’s Framework for the preparation and presentation of financial statements gives
qualitative characteristics that make financial information reliable.
Which of the following are examples of those qualitative characteristics?
A faithful representation, neutrality and oiudence
B Neutrality, comparability and true and fair
view C Prudence, comparability and accruals
D Neutrality, accruals and going concern
(2 marks)
9 Which of the following statements is/are correct?
1) Materiality means that only items having a physical existence may be recognised as
assets.
(2) The substance over form convention means that the legal form of a transaction must
always be shown in financial statements even if this differs from the commercial
effect.
(3) The accruals basis means that sales are recognised in the accounts as they occur and not
when the cash is received.
A 2 only
B 1, 2 and 3
C 1 only
D 3 onIy
(2 marks)
10 Which TWO of the following are important underlying assumptions for financial statements
according to the IASB’s framework for the Preparation and Presentation of Financial
Statements ?
(I) Relevance
(2) Going concern
(3) Prudence
(4) Accruals
A 1 and 2 only
B 2 and 3 only
C 3 and 4 only
D 2 and 4 only
(2 marks)
464
 EXAM QU ESTION BAN K

11 Which of the following explains the imprest system of opera!ing petty cash?
A Weekly expenditure cannot exceed a set amount.
B The exact amount of expenditure is reimbursed at intervals to maintain a fixed
float. C API expenditure out of the petty cash must be properly authorised.
D Regular equal amounts of cash are transferred into petty cash at intervals.
(2 marks)
12 Petty cash is controlled under an imprest system. The imprest amount is $100. During a period,
payments totalling 853 have been made.
How much needs to be reimbursed at the end of the period to restore petty cash to the imprest
account?
A $100
B $53
C $47
D $50
(2 marks)
' 13 Which of the following documents should accompany a payment made to a supplier?
A Supplier statement
B Remittance advice
C Pu<chaseinvoice
D Purchase order

(2 marks)
14 Which of the following are books of prime entry?
( ) Sales day book
(2) Cash book
(3) Supplier statements
f4) Petty cash voucher
A 1 and 2 only
B 1, 2 and 4 only
C I only
D All of them

(2 marks)
15 In which book of prime entry will a business record credit notes received in respect of
goods which the business has sent back to its suppliers?
A The sales returns day book
B The cash book
C The purchase returns day book
D The purchase day book
(2 marks)
16 The business entity concept requires that a business is treated as being separate from
its owners
Is this statement true or
false? A True
B False
(1 mark)

465
 A business sells $100 worth of goods to a customer, the customer pays $50 in casl1
immediately
and will pay the remaining $50 in 30 days time.
What is the double entry to record the sale?
A Debit cash $50, credit receivables $50, credit sales $50
B Debit receivables 850, debit cash $50, credit sales
S100 C Debit sales $t00, credit receivables 850, credit cash
$50 D Debit sales $100, credit cash $t00
(2 marks)
18 Chalk purchases $500 worth of cheese from Cheddar Co. Chalk agrees to pay Cheddar Co in 30
days time. What is the double entry to record the purchase in Cheddar Co’s books?
A Debit sales 8500, credit receivables $500
B Debit purchases 8500, credit payables
$500 C Debit receivables $500, credit sales
5500
D Debit payables $500, credit purchases $500
(2 marks)
19 Which TWO of the following are credit
entries?
( ) An increase in a liability
(2) A decrease in a liability
(3) An increase in income
(4) A decrease in income
A T and 3
B 1 and 4
C 2 and 3
D 2 and 4 (2 marks)
20 If the total debits exceed the total credits in a T account, does the account have a debit
or a credit balance?
A Credit balance
B Debit balance
t1 mark)
2I Does a debit balance brought down in the Cash T-account represent an asset or a liability?
A An asset
B A liability
(1 mark)
22 A company’s motor vehicles at cost account at 30 June 20X6 is as
follows
MOTOR VEHICLES — COST

Balance b/d 35,800 Disposal t2,000

Additions 12,950 Balance càd Ü6,750
48,750 48,750

What opening balance should be included in the following period’s trial balance for motor
vehicles — cost at 1 July 20X6?
A $36,750 DR
B $48,750 DR
C $36,750 CR
D $48,750 CR
(2 marks)
466
 EXAM QU ESTION BANK

23 A company’s trade payables account at 30 September 20X1 is as follows:

TRADE PAYABLES ACCOUNT

Cash at bank 21,600 Balance b/d 14,000

Balance c/d Ï1,900 Purchases î9,500
33,ñî00 33,500
What opening balance should be included in the following period’s trial balance for
payables at 1 October 20X1?
A $33,500 DR
B $11,900 DR
C $1 ,900 CR
D $33,500CR
(2 marks)
24 An accountant has inserted all the relevant figures into the trade receivables account, but has
not yet balanced off the account.
TRADE RECEIVABLES ACCOUNT

Balance b/d 100,750 Cash at bank 250,225

Sales 325,010

Assuming there are no other entries to be made, other than to balance off the account,
what is the closing balance on tf\e trade receivables account?'
A 5425,760 DR
B $175,535 DR
C $425,760 CR
D $T75,535 CR
(2 marks)

25 Sales tax should be included in the income statement of a registered trader.

Is this statement true or false?
A True
B False

26 Which of the following statements about sales tax is/are true?

(1) Sales tax charged on purchases is an expense to a business if the business is not sales
tax registefed
(2) Sales tax is charged by all businesses when they sell
products A 1 only
B 2 only
C Both 1 and 2
D Neither I or 2
(2 marks)

467
 27 A sales tax registered business in its first period of trading charges $8,000 of sales tax on its
sales and suffers $6,750 of sales taX on its purchases which includes $1,250 irrecoverable
sales tax on business entertaining.
How much sales tax is due to or receivable from the tax authorities at the end of the first
period of trading?
A $2,500 due to the tax authorities
B $2,500 receivable from the tax
authorities C $t250 due to the tax
authorities
D Nil due to or receivable from the tax authorities
(2 marks)
28 Michael, a sales tax registered trader, sells goods on ¢redit to Darren for $880 plus
sales tax. Darren is not registered for sales tax. Sales tax is charged at 20%.
What are the entries in Michael’s accounts for this sale?

Sales account Sales tax account Receivables account

A OR 880 nil CR 880
B DR 880 DR 176 CR 1,056
C CR 880 nil DR 880
D CR 880 CR 176 DR 1,056
(2 marks)
29 According to IAS 2 Inventories, which of the following costs should be included in valuing the
inventories of a manufacturing company?
(I) Carriage inwards
(2) Carriage outwards
(3) Depreciation of factory plant
(4) Storage costs of finished goods
A All four items
B 1, 2 and 4 only
C 2 and 3 only
D I and 3 only
(2 marks)
30 A company values its inventory using the first in, first out (FIFO) method. At 1 January 20X5 the
company had 800 widgets in inventory, valued at $75 each.
During the year ended 31 December 20X5 the following transactions took place:
20X5
I February Purchased 500 widgets At $80 each
I May Sold 400 widgets for 545,000
I August Purchased 450 widgets At $69 each
1 5 November Sold 450 widgets For 828,750
What is the value of the company’s closing inventory of widgets at 31 December 20X5?
A $8,000
B 866,854
C 867,050
D $68,000
(2 marks)

468
 EXAM QUEST 10 N BAN K

31

A a higher profit and a lower closing inventory value

B a higher profit and a higher closing inventory
value C a lower profit and a lower closing
inventory value D a lower profit and a higher
closing inventory value
(2 marks)
32 An organisation's inventory at 1 July is 15 units @ $3.00 each. The following movements occur:
• 3 July 20X6 5 units sold at $3.30 each
• 8 July 20X6 10 units bought at $3.50 each
• 1 2 July 20X6 8 units sold at $4.00 each
What would be the closing inventory at 31 July, using the FIFO method of inventory valuation?
A $31.50
B $36.00
C $39.00
D $41.00
(2 marks)
33 Your organisation uses the weighted average cost method of valuing inventories. During
August 20Xt , the following inventory details were recorded:
Opening balance 30 units valued at $2 each
5 August purchase of 50 units at $2.40 each
10 August issue of 40 units
18 August purchase of 60 units at $2.50 each
23 August issue of 25 units
What is the value of the inventory at 3I August 20X1?
A $172.50
B $176.25
C $180.00
D $187.50
(2 marks)
34 What is the correct double entry to record the depreciation charge for a
period?
A DR Depreciation expense
CR Accumulated depreciation
B DR Accumulated depreciation
CR Depreciation expense
(1 mark)
35 At 31 December 20X4 Q, a limited liability company, owned a building that it had purchased 10
years ago for $800,000. It was being depreciated at two per cent per year on the straight line

On 1 January 20X5 a revaluation to $t,000,000 was recognised. At this date the buiiding had a
remaining useful life of 40 years.
What is the depreciation charge for the year ended 31 December 20X5 and the revaluation
Depreciation charge for year ended 31 Pevaluation surplus as at
December 20XS 1 January 20X5

A 25,000 200,000
B 25,000 360,000
C 20,000 200,000
20,000 360,000

469
surplus balance as at 1 January 20X5?
 (2 marks)
36 An organisation's asset register shows a carrying value ot 8t35,600. The non current
asset account in the nominal ledger shows a carrying value of 8125,600.
Which of the following disposals, if not deducted from the asset register, could account for
the difference?
A Asset A with disposal proceeds of $15,000 and a profit on disposal of 85,000
B Asset B with disposal proceeds of $\5,000 and a carrying value of
85,000 C Asset C with disposal proceeds of $t5,000 and a loss on disposal of
85,000 D Asset D with disposal proceeds of 85,000 and a carrying value of
$5,000
(2 marks)
37 In the year to 3 1 December 20X9, Jason recorded some capital expenditure as
revenue expenditure.
What is the effect on his profit for the year to 3I December 20X9 and his net assets at that
date?
Pro fit Net assets
A Overstated Overstated
B Overstated Understated
C Understated Overstated
D Understated Understated
(2 marks)
38 Which of the following are capital, as opposed to revenue, expenses?
(T) The repair of a machine currently used in the production process that has broken down

(2) The cost of an extension to a factory building, which doubles the size of the production
area
(3) The cost of installing a new machine in a
factory 2 only
B I and 2 only
C 2 and 3 only
D 1, 2 and 3
(2 marks)
39 The trucks account (at cost) of a business for the year ended 3t December 20X1 was as follows:
TRUCKS — COST
20XI 20XI

1 Jan Balance 240,000 31 Mar Disposal account 60,000

30 June cash— purchase of vans 60t000 31 Dec Balance 340,000
400,000 400,000
Brought forward accumulated depreciation at I January 20X1 was $115,000. The truck
disposed of on 31 March had a carrying value of $20,000.
The company’s policy is to charge depreciation at 20% per year on the reducing balance, and
charges a full year's depreciation in the year of acquisition and none in the year of disposal.
What should be the depreciation charge for the year ended 3 1 December 20X1?
A $68,000
B $57,000
C $53,000
D $21,000
t2 marks)

470
 EXAM QUESTION BAN K

40 Which of the following statements about research and development expenditure are correct?
(1) ) Research expenditure, other than capital expenditure on research
facilities, should be recognised as an expense as incurred.
(2) In deciding whether development expenditure qualifies to be recognised as an asset,
one of the factors it is necessary to consider is whether there will be adequate
finance available to complete the project.
(3) Development expenditure recognised as an asset must be amortised over a period
not exceeding five years.
A I, 2 and 3
B I and 2 only
C l and 3 only
D 2 and 3 only
(2 marks)

41 Bluebottle Co has incurred development expenditure of 8500,000 and research expenditure of

$400,000 in the year ended 3 1 December 20XI. The development expenditure has been
capitalised in accordance with IAS 38. Bluebottle Co’s policy is to amortise capitalised
develooment expenditure over 25 years.
What balances relating to research and development would appear in the financial statements
of Bluebottle for the year ended 31 December 20X1?

Statement ot financial position Income statement

$900,000 $ni1
$TOO,000 $400,000
$864,000 $36,000
D $480,000 $420,000
t2 marks)
42 Dodger Co’s financial statements show a carrying value of $950,000 for capitalised
development exDenditure. Its policy is to amortise development expenditure on a straight line
basis at 5% per annum. Accumulated amortisation brought forward is $50,000.
What is the charge in the income statement for the years amortisation?
A $43, TOO
B B47,500
C 845,000
D $50,000
(2 marks)

43 Ajeet prepared his draft end of year accounts. However he has now realised that he did not
adjust these for a prepayment of $2, T 00 and an accrual of 8800.
How will Ajeet‘s profit and net assets be affected by including the prepayment and accrual?
Net Profit will: Net assets will
A Increase by 82,900 Reduce by $2,900
B Increase by 81,300 |ncrease by
$1,300 C Reduce by $t,300
Increase by $1,300 D Reduce by $2,900
Reduce by $2,900
(2 marks)

471
 44 Gamma Co prepares its financial statements for the year to 30 September each year. The
company pays rent for its premises quarterly in advance on 1 February, I May, 1 August
and I November each year. The annual rent was 8t20,000 per year until 30 April
20X8. It was increased from that date to 8144,000 per year.
What balances were included in the income statement and the statement of financial position
for the year ended 30 September 20X8?
Income statement Statement of financial position
Expense Accrual Prepayment
$130,000 nil 812,000
B $t30,000 $24,000 nil
C $t32,000 nil $t2,000
D $132,000 $24,000 nil
(2 marks)
45 A company receives rent from a large number of properties. The total received in the year
ended 30 June 20X2 was $1,203,000.
The following were the amounts of rent in advance and in arrears at 30 June 20X1 and 20X2:
30 June 20XT 30 June 20X2

Rent received in advance 71,750 78,000

Rent in arrears (all subsequently received) 53,000 46,000
What amount of rental income should appear in the company’s income statement for the year
ended 30 June 2OX2?
A $T,152,250
B 81,189,750
C $T,216,250
D $1,253,750
(2 marks)
46 Which of the following statements is/are true?
(I) Accrued expenses are expenses which relate to the current accounting period but
have not been paid for. They are shown in the income statement for the current
period in accordance with the accruals concept.
(2) Prepaid expenses are expenses which have already been paid in the current
period but relate to a future accounting period. They are shown in the income
statement for the current period in accordance with the prudence concept.
A T only
B 2 only
C Both 1 and 2
D Neither statement is true
(2 marks)
47 At 30 June 20X5 a company's allowance for receivables was $39,000. At 30 June 20X6
trade receivables totalled $5t 7,000. It was decided to write off debts totalling $37,000
and to adjust the allowance for receivables to the equivalent of 5 per cent of the trade
receivables based on past events.
What figure should appear in the income statement for the year ended 30 June 20X6 for these items?

A $61,000
B $22,000
C $24,000
D $23,850
(2 marks)

472
 EXAM QUEST 10N BA NK

48 Which of the following statements is/are true?

(I) An aged receivables analysis is a report used to help the business pay its suppliers on time
(2) A credit limit is the minimum amount a customer must spend when purchasing goods
on credit from a supplier
A T only
B 2 only
C Both 1 and 2
D Neither 1 and 2
(2 marks)

The following information relates to questions 49 and

50.
North Co has a receivables balance at 3 1 October 20X7 of $456,330. The accountant at
North is preparing the financial statements for the year ended 31 October 20X7 and must
account for the following.
(1 ) A balance owed by South Co of 8780 is deemed irrecoverable and must be written off.
(2) The brought forward receivable allowance is 815,255. North Co have a policy to provide
for 5% of the outstanding receivables balances.
(3) A payment of $450 from East Co has been received on 30 October. The payment
relates to a balance that had previously been written off as irrecoverable by North
Co.
49 What value for receivables should appear in the statement of financial position of North Co at
31 October 20X7?
A $432,733.50
B $432,772.50
C $433,222.50
D $433,5T3.50
(2 marks)
50 What is the total amount that should appear in the income statement for irrecoverable debts
expense at 31 October 20X7?
A $7,522.5
B $7,852.5
C $7,891.5
D $8,302.5
(2 marks)
How should a contingent liability be included in a company’s financial statements if the
likelihood of a transfer of economic benefits to settle it is remote?
A Disclosed by note with no provision being
made B No disclosure or provision is required
(1 mark)
52 The following conditions exist:
• An event has occurred which means Booker Co has incurred a present obligation
• It is probable that Booker Co will have to pay out cash in order to settle the obligation
• A reliable estimate of the amount involved can not be determined
What is the effect of the above on the financial statements of Booker Co?
A A provision should be created
B A contingent liability should be disclosed
C A contingent asset should be
disclosed D No effect
(2 marks)
473
 53 Raider Co has to include the following items in its financial statements.
(1) Raider Co has been sued by Space Co for breach of trademark. Raider Co strongly
disputes the claim and Raider Co's lawyers advise that the likelihood of having to pay any
money to Soace Co for the claim is remote.
(2) Raider Go gives warranties on its products, Data from previous years show that about
t5% of sales give rise to a warranty claim,
How should the items be reflected in the financial statements of Raider Co?
Item 1 Item 2
create a Drovision disclose by note only
B disclose by note only create a provision
disclose by note only disclose by note only
no provision or disclosure required create a provision

(2 marks)
54 Punt Co selIs vacuum cleaners with a warranty. Customers are covered for the cost of repairs of
any manufacturing defect that becomes apparent within the first year of purchase. The company's
past experience and future expectations indicate the following pattern of likely repairs.
% of goods sold Defects Cost of repairs
$ 000
80 None
t2 Minor 545
8 Major 800
The warranty provision brought forward is 899,750.
What amounts should be recognised in the financial statements of Punt Co relating to the
warranty provision for the year to 20X3?
Income statemenf StatemenI o f financial position
A $99,750 Cr nil
B 899,750 Dr nil
c $29,650 Dr $t29,400 Cr
D 829,650 Cr $} 29,400 Cr
(2 marks)
55 A company has a brought forward payables balance of $308,600 Cr. The following control
account has been prepared by a trainee accountant.
PAYABLES LEDGER CONTROL ACCOUNT

Opening balance 308,600 Credit purchases 337,200

Interest payable on overdue 3, 600 Cash purchases 55,670
amounts
Contras against credit balance in T ,400 Goods returned by customers 2,400
receivable ledger
Cash paid 222,340 Discounts received ^,900
Closing balance \35,770
535,940 535,9^0
What should the closing balance be when all the errors made in preparing the payables ledger
control account have been corrected?
A 5202,440
B $420,760
C $470,#3O
D $472,830
(2 marks)

474
 EXA M Q UEST ION BAN K

56 Claire is trying to reconcile the list of receivables balances with the balance on the
receivables control account.
Which of the following would cause a difference between the total of the list of receivables
balances and the balance on the receivables control account?
(I) An invoice for 8456 was entered as $546 in error in the sales day book

(2) A credit note for 8150 was omitted from the sales day book, but was credited to
the customer’s personal account in the receivables ledger
A 1 only
B 2 only
C Both I and 2
D Neither T or 2
(2 marks)
57 Roger has discounts allowed of 8600 in his trial balance.
How should this amount be reported in his financial
statements?
A $600 Cr to purchases
B 8600 Dr to purchases
C 8600 Dr to expenses
D $600 Dr to other income
(2 marks)
58 Angus received a statement of account from a supplier, Aberdeen, showing a balance to be paid
of 8L4,560 at 3 1 August 20X1. Angus’s payables ledger account for Aberdeen shows a
balance due to Aberdeen of $1 2,160.
Investigation reveals the following:
(T) A credit note received by Angus for goods returned to Aberdeen has been
incorrectly recorded in Angus's books as $4,200 instead of $2,400. The credit
note is correctly recorded on the statement from Aberdeen.
(2) Aberdeen has aIIoWed Angus a cash discount of $t 50 which has not yet been recorded in
Angus's ledger account.
What discrepancy remains between Angus’s and Aberdeen’s records after allowing for these
items?
A Anil
B $150
C $750
D $4,350
(2 marks)

59 Mountain sells goods on credit to Hill. Hill receives a 10% trade discount from Mountain
and a further 5% settlement discount if goods are paid for within 14 days. Hill bought
goods with a list price of $200,000 from Mountain.
What amount should be included in Mountain’s receivables ledger for this transaction?
A %180,000
B %190,000
C 5171,500
D S171,OO0
(2 marks)

475
60 The following bank reconciliation statement has been prepared by a trainee accountant:

Overdraft per bank statement 3,860

less: Outstanding cheques 9,160
5,300
add: Deposits credited after date 16,690
Cash at bank as calculated 21,990
above
What should be tfie correct balance per the cash book?
A $2t ,990 balance at bank as
stated B $3,670 balance at bank
C $11,390 balance at bank
D $3,6 70 overdrawn.
(2 marks)
61 In preparing a company's bank reconciliation statement at March 20X6, the following items are
causing the difference between the cash book balance and the bank statement balance:
(1) ) Bank charges $380
(2) Error by bank $ T ,000 (cheque incorrectly debited to the account)
(3) Lodgements not credited
$4,580 f4) Outstanding
cheques $t ,475
f5) Direct debit $350
f6) Cheque paid in by the company and dishonoured
$400. Which of these items will require an entry in the
cash book?
A 2, 4 and 6
B I, 5 and 6
C 3, 4 and 5
D 1, 2 and 3
(2 marks)
62 Which of the following items reconciling the balance on the bank ledger account to the
balance shown on the bank statement are referred to as timing diflerences?
(i) Bank charges not recorded in the cash book
(ii) Interest charged not recorded in the cash book
(iii) Outstanding lodgements
(iv) Unpresented cheques
A (i) and (ii)
B (iii) and (ivJ
C (ii) and (iii)
D (i) and (v)

(2 marks)
63 Mauritz Co is preparing a bank reconciliation. The bank balance in the general ledger is
$540 credit. There are two items that have not yet been dealt with.
(I) A cheque for $620 was sent to a supplier but is not yet showing on the bank statement
(2) A bank charge of $28 was charged by the bank, but was not recorded Mauritz Co.
What is the closing balance on Mauritz Co’s bank statement?
A $1,132 overdrawn
B $1, t88 overdrawn
C $52 cash at bank
D $108 cash at bank
(2 marks)
476
 EXAM QUESTION BAN K

64 The debit side of a company’s trial balance totals $800 more than the credit
side. Which one of the following errors would fully account for the
difference?
A $400 paid for plant maintenance has been correctly entered in the cash book
and credited to the plant asset account.
B Discount received $400 has been debited to discount allowed account
C A receipt of $800 for commission receivable has been omitted from the
records D The petty cash balance of $800 has been omitted from the trial
balance.
(2 marks)
65 A suspense account was opened when a trial balance failed to agree. The following errors
were later discovered.
• A gas bill of 5420 had been recorded in the gas account as 8240
• A discount of $50 given to a customer had been credited to discounts received
• Interest received of 570 had been entered in the bank account only
What was the original balance on the suspense account?
A DEBIT $2L 0
B CREDIT $2 L0
C DEBIT $160
D CREDIT $160
(2 marks)
66 The bookkeeper of Field made the following mistakes: Di5counts allowed $3,840 was
credited to the discounts received account Discounts received $2,960 was debited to the
discounts allowed account
Which journal entry will correct the errors?
DR
A Discounts allowed $7,680
Discounts received $5,920
Suspense account %1,760
B Discounts allowed $880
Discounts received 8880
Suspense account $1,760
C Discounts allowed $6,800
Discounts received $6,800
D Discounts allowed $3,840
Discounts received $2,960
Suspense account $880
(2 marks)
67 A sole trader took some goods costing $800 from inventory for his own use. The normal
selling
price of the goods is $1,600.
Which of the following journal entries would correctly record this?
Dr Cr

A Drawings 800
account Inventory 800
account 800
B Drawings account 800
Purchases account 1,600
C Sales account 1,600
Drawings
account (1 mark)
477
68 Which o1 the following calculates a sole trader’s closing net assets?
A Opening net assets — drawings + capital introduced + profit
B Opening net assets + drawings * capital introduced +
profit C Opening net assets + drawings — capital introduced —
profit D Opening net assets — drawings — capital introduced +
profit
(2 marks)
69
A fire on 30 September destroyed some of a company's inventory and its inventory records. The
following information is available:

Inventory \ September 3t8,000

Sales for September 612,000
Purchases for September 41 2,000
Inventory in good condition at 30 September 21 4,000
Standard gross profit percentage on sales is 25%
Based on this information, what is the value of the inventory lost?
A $96,000
B 827 I ,000
C $26,400
D $57,000

(2 marks)
70 Bob is a sole trader. He has calculated a cost of sales figure for the year, which is 8342,000.
Bob received a payment of $8,030 into the business bank account for goods sold on a special
deal to Harry and this amount has been included within sales. The figure of $8,030 was
calculated by adding a mark up of 10% to the cost of the goods. His gross profit percentage on
all other goods sold was 20% of sales.
What is the total figure of sales for the year?
A $401,640
B $402,370
C $ t8,375
D $426,405
(2 marks)
71 Ossie does not keep full accounting records. The last accounts drawn up show that his
capital balance was $5t,980. At the year end he calculated that his assets and liabilities
at 30 June 20X0 were:

Non-current assets 5T,300

Inventory 7,770
Receivables 5,565
Payables 3,994
Bank overdraft 3,537
On reviewing his calculations, you note that there were no entries made in relation to rent
for June 20X0 because the rent for June 20X0 was paid on I July 20X0. Rent is $500
per month.
What is the value of 0ssie’s closing capital?
A $51,980
B $56,604
C $57,604
D $63,678
(2 marks)
478
 EXAM Q UEST 10N BAN K

72 Patience is trying to work out her ¢ost of sales for the year ended 31 December 20X9.
She has the following details for supplier and inventory balances:
At 1 January 20X9 At 31 December 20X9
Suppliers $15,264 $16,812
Inventory $6,359 $4,9 1 9
In the year to 31 December 20X9, Patience's payments to suppliers totalled $141,324.
What was Patience’s cost of sales for the year to 31 December 20X9?
A $149,231
B $144,3T2
C $142,872
D $14T,432
(2 marks)
73 Should dividends paid appear on the face of a company’s income
statement? A Yes
B No
(1 mark)
74 Which of the following journal entries are correct, according to their
narratives?
Dr
1 Suspense account I 8,000
Rent received account 18,000
Correction of error in posting $24,000 cash received for rent to the rent received amount as
$42,000
2 Share premium account 400,000
Share capital account 400,000
1 for 3 bonus issue on share capital of 1 ,200,000 50c shares
3 Trade investment in X 750,000
Share capital account 250,000
Share premium 500,000
account
500,000 50c shares issued at $1 .50 per share in exchange for shares in X
A 1 and 2
B 2 and3

D 3 only

(2 marks)
75 Which of the following should appear in a company's statement of changes in equity?
Profit for the financial year
2 Dividends proposed during the year
3 Surplus on revaluation of non-current assets
A All three items
B 2 and 3 only
C 1 and 3 Inly
D l and 2 only
(2 marks)
 479
76 Lorel Co, a limited liability company, has the following capital structure:
Share capital %OOO
50c ordinary shares 45,000
Share premium 60,000
105,000
The company made a bonus issue of 2 shares for every 3 shares held, using the share premium
account for the purpose.
What was the company’s capital structure after the bonus issue?
Ordinary share copitol $hore premium account

A 60,000 45,0OO
B 75,000 30,000
105,000 nil
D 112,500 (7,500)
(2 marks)
77 Which of the following statements is/are correct?
(1 IAS 1 requires that some items must appear on the face of the statement of financial
position
(2) IAS 1 requires that a company must present a combined statement of comprehensive
income
1 only
B 2 only
Both 1 and 2
D Neither 1 or 2
(2 marks)
?8 Where are the following items shown in a company’s financial
statements?
(1) Gains on property revaluations
(2) Dividends paid
(3) Bonus issue of shares
Statement o f comprehensive income
Sfatemenf o f changes ;n equity
A (1 ) and (2) only (2) and (3) onIy
B (L) and (3) only (I ) and (2) only
c (1) only (I), (2) and (3)
D (I) only {2) and (3) only
(2 marks)
79 Which of the following is/are required for disclosure of revalued assets in a company’s
financial statements?
(1) The methods and significant assumptions applied in estimating the value
(2) Whether an independent valuer was involved in the valuation
(3) How certain the directors are that the valuation will not change in the next 5 years
A (1) only
B (I) and (2) on|y
C (2) only
D All three are required
(2 marks)

480
 EXAM QUEST ION BANK

80 Where should the following be classified in a company’s statement of financial position at

31 December 20X1?
1) An overdraft balance of C55,000
(2) A loan from a bank due for repayment in full in July 20X3
Current liabilities Current assets Non-current liabilities
(I) — (2)
B (1) and (2)
c (2) (1)
D (1) and (2)
(2 marks)
81 Which material events after the reporting period should be disclosed in the notes to financial
statements according to IAS 10 Events after the reporting period.
A Adjusting events
B Non-adjusting events
(1 mark)
82 H has prepared its financial statements for the year ending 30 June 20X8. On 15 July a
major fraud was uncovered which had taken place during the year to 30 June. On 31 July
the company made a bonus issue of shares that significantly increased the number of
shares in issue.
In accordance with IAS IO Events after the reporting period, how should the two events be
treated in the financial statements?
Fraud
Bonus share issue
A Accrued in accounts
Disclosed in notes
B Accrued in
Accrued in accounts
accounts Disclosed in notes
c Disclosed in notes Accrued in accounts
D Disclosed in notes
(2 marks)
83 The following material events take place after the reporting date of 3 1 December 20Xt
and before the financial statements for Tapenade Co are approved.
(1) Barroles Co, a major customer of Tapenade Co, went into liquidation. Tapenade Co
has been advised that it is highly unlikely to receive any of the outstanding debt of
$150,000 owed by Barroles at the year end.
(2) A fire occurred in the warehouse of Tapenade Co and stock costing 875,000 was
destroyed.
Adjustments are made in the financial statements as required by IAS T 0 Events a fter the
reporting date.
What is the effect on net profit in the financial statements at 31 December 20X1 of making the
required adjustments?
A Reduction of $l 50,000
B Reduction of $75,000
C Reduction of $225,000
D No effect on profit

(2 marks)
481
 84 Part of a company's statement of cash flows is shown
below:
%000
Operating profit 8,640
Depreciation charges 2,160)
Increase in inventory (330)
Increase in accounts payable 440
The following criticisms of the extract have been made:
(1) Depreciation charges should have been added, not deducted.
(2) Increase in inventory should have been added, not deducted.
(3) Increase in accounts payable should have been deducted, not added.
Which of the criticisms are valid?
A 2 and 3 only
B I only
C 1 and 3 only
D 2 only

85 Which of the following items could appear in a company’s statement of cash

flows? Surplus on revaluation of non-current assets
Proceeds of issue of shares
Proposed dividend
Dividends received
\ and 2
B 3 and 4
I and 3
D 2 and 4
(2 marks)
86 Which of the following statements is/are correct?
(1) An increase in a loan made to another company will be classified under investing cash
flows.
An increase in a loan from a bank will be classified under investing cash flows.
Bonus issues of shares do not feature in statements of cash flows.
A loss on the sale of a non current asset will be deducted from net profit in order to
calculate operating cash flows using the indirect method.
A l and 2
B I and 3
C 3 onIy
D 1 and 4
(2 marks)

482
 EXAM QUEST 10 N BANK

87 How should the following investments be accounted for in the consolidated financial
statements of Barracuda Inc?
(\) Investment of 30,000 ordinary shares in Minnow Inc. Minnow has a total of 45,000
ordinary shares.
(2) Investment of 2 \ % of the ordinary shares in Major Inc. Barracuda Inc has the
right to appoint 4 out of 6 of the board of directors of Major Inc.
Subsidiary Associate

A f1) (2)
B (1)(2)
C (1),(2)
D (2) (1)
(2 marks)
88 Which of the following statements is/are correct?
(I ) If a company owns more than 50% of the ordinary shares of another company,
the investment will always be classified as a subsidiary
(2) Consolidated accounts are required for a group of companies in order to represent
the legal torm, rather than the substance, of the relationship between the parent
and its subsidiaries
(3) An trade investment is an entity in which an investor has significant influence, which is
neither a subsidiary or a joint venture of the investor.
A (T) and (2) only
B (1) only
C All three statements are correct
D None of the statements are correct
(2 marks)
89 Alpha is an associate of Delta.
How should profits generated by Alpha be shown in the consolidated accounts of Delta?
A All the profits after tax generated by Alpha are included by consolidating the revenue and
expenses of Alpha a line by line basis from revenue down to profit for the year
B Delta’s share of Alpha’s profit after tax is included by the payment of a dividend
from Alpha to Delta, which is shown in the consolidated income statement of Delta
C Delta’s share of Alpha’s profit after tax is included in the consolidated income statement
of Delta as a single amount
D All the orofits after tax generated by Alpha are included in the in the consolidated income
statement of Delta as a single amount
(2 marks)

483
 90 Martin Co owns 100% of Kyle Co. The following information has been extracted from the
individual company statements of financial position as at 31 December 20X8.
Martin Co Kyle Co

Current assets 250,000 t00,000

Current liabilities I t0,000 45,000
Included in the receivables of Martin Co and the payables of Kyle 0o is an amount of $6,000
owed to Martin Co by Kyle Co.
If there are no other intra-group balances what amount would be shown for consolidated
current assets?
A $149,000
B $350,000
C $344,000
D $356,000
(2 marks)
91 Holder ldc acquired 150,000 $1 ordinary shares in Sub Inc on 1 July 20X6 at a cost of
$300,000. Sub Inc's reserves at I July 20X6 were $36,000 and its issued ordinary share
capital was 8200,000. The fair value of the non controlling interest at acquisition was
$ 100,000.
At 30 June 20X9 Sub Inc's reserves were St6,000.
What is the goodwill arising on consolidation?
A $64,000
B $123,000
C $164,000
D $184,000
(2 marks)
92 Alpha Co acquired 80% of all the share capital of Beta Co on 1 January 20Xt . The consideration
given was 8500,000. On 1 January the fair value of Beta Co's net tangible assets was $450,000
and the fair value of the non controlling interest was 8 T 25,000.
At 3t December 20X1 the fair value of the net tangible assets of Beta Co are
$600,000. What is the amount of goodwill to be entered in the consolidated
accounts?
A 825,000
B $50,000
C $L 75,000
D $265,000
(2 marks)
93 Vaynor Co acquired t00% ot the ordinary shares in Weeton Co and Yarlet Co some years
ago. Extracts from the statements of financial position of the three companies as on 30
September 20X7 were as follows.
Vaynor Co Weeton Co Yarlet Co
$'000 8’000 $ 000
Retained earnings 90 40 70
At acquisition Weeton Co had retained losses of $10,000 and Yarlet Co had retained earnings of
830,000.
What are the consolidated retained earnings of Vaynor Co on 30 September 20X7?
A 8160,000
B $180,000
C 200,000
D 8220,000
(2 marks)

484
 EXAM Q U ESTIO N BAN K

87 How should the following investments be accounted for in the consolidated financial
statements of Barracuda Inc?
(\) Investment of 30,000 ordinary shares in Minnow Inc. Minnow has a total of 45,000
ordinary shares.
(2) Investment of 2 \ % of the ordinary shares in Major Inc. Barracuda In¢ has the right to
appoint 4 out of 6 of the board of directors of Major Inc.
Subsidiary Associoie
A (1) (2)
B (I), (2)
c (\), (2)
D (2) (1)
(2 marks)
88 Which of the following statements is/are correct?
(I ) If a company owns more than 50% of the ordinary shares of another company,
the investment will always be classified as a subsidiary
(2) Consolidated accounts are required for a group of companies in order to represent
the legal form, rather than the substance, of the relationship between the parent
and its subsidiaries
t3) An trade investment is an entity in which an investor has significant influence,
which is neither a subsidiary or a joint venture of the investor.
A (T) and (2) only
B (1) only
C AII three statements are correct
D None of the statements are correct

(2 marks)
89 Alpha is an associate of Delta.
How should profits generated by Alpha be shown in the consolidated accounts of Delta?
A All the profits after tax generated by Alpha are included by consolidating the revenue and
expenses of Alpha a line by line basis from revenue down to profit tor the year
B Delta’s share of Alpha’s profit after tax is included by the payment of a dividend
from Aloha to Delta, which is shown in the consolidated income statement of Delta
C Delta’s share of Alpha’s profit after tax is included in the consolidated income statement
of Delta as a single amount
D All the profits after tax generated by Alpha are included in the in the consolidated
income statement of Delta as a single amount
(2 marks)

483
90 Martin Co owns t00% of Kyle Co. The following information has been extracted from the
individual company statements of financial position as at 3I December 20X8.
Martin Co KyeCo

Current assets 250,000 100,000

Current liabilities I 10,000 45,000
Included in the receivables of Martin Co and the payables of Kyle Co is an amount of
$6,000 owed to Martin Co by Kyle Co.
If there ate no other intra-group balances what amount would be shown for consolidated
current assets?
A $149,000
B $350,000
C $344,000
D $356,000
(2 marks)
91 Holder Inc acquired I 50,000 $1 ordinary shares in Sub Inc on l July 20X6 at a cost of
$300,000. Sub Inc's reserves at I July 20X6 were $36,000 and its issued ordinary share
capital was $200,000. The fair value of the non-controlling interest at acquisition was
8 T 00,000.
At 30 June 20X9 Sub Inc’s reserves were 816,000.
What is the goodwill arising on consolidation?
A $64,000
B $ 123,000
C 8164,000
D 8I 84,000
(2 marks)
92 Alpha Co acquired 80% of all the share caDital Of Beta Co on I January 20XI. The
consideration given was $500,000. On T January the fair value of Beta Co's net tangible
assets was $450,000 and the fair value of the non-controlling interest was $125,000.
At 3T December 20X1 the fair value of the net tangible assets of Beta Co are $600,000.
What is the amount of goodwill to be entered in the consolidated accounts?
A $25,000
B 850,000
C SP 75,000
D $265,000
(2 marks)
93 Vaynor Co acquired 100% of the ordinary shares in Weeton Co and Yarlet Co some years
ago. Extracts from the statements of financial position of the three companies as on 30
September 20X7 were as follows.
Vaynor Co Weeton Co Yarlet Co
$ ooo s'ooo s ooo
Retained earnings 90 40 70
At acquisition Weeton Co had retained losses of $l 0,000 and Yarlet Co had retained earnings of
$30,000.
What are the consolidated retained earnings of Vaynor Co on 30 September 20X7?
A $160,000
B S1 80,000
C 200,000
D 8220,000
(2 marks)

484
 EXAM QU ESTIO N BAN K

94 Spring Co has held 75% of the equity share capital of Summer Co for many years. Cost of
sales
for each entity for the year ended 31 December 20X8 was as follows.

Spring Co 200,000
Summer Co 160,000
During the year Spring Co sold goods costing $t0,000 to Summer Co for $16,000. At the year
end, all these goods remained in inventory.
What figure should be shown as cost of sales in the consolidated income statement of
the Spring Group for the year ended 31 December 20X8?
A 8344,000
B $350,000
C $360,000
D $370,000

(2 marks)
The following information relates to questions 95 and 96
Patience Co has a subsidiary, Bunthorne Co. During 20X1 Bunthorne Co sold goods to Patience Co for
$40,000 which was cost plus 25%. At 31 December 20XL $20,000 of these goods remained unsold.
95 What will revenue will be reduced by in the consolidated income statement for the year
ended 31 December 20X1?
A 820,000
8 $30,000
C $32,000
D $40,000

(2 marks)
96 What will profit will be reduced by in the consolidated income statement for the year
ended 31 December 20X1?
A 84,000
B $6,000
C 88,000
D $10,000
(2 marks)

97 The following figures related to Sanderstead 0o and its subsidiary Croydon Co for the year
ended 3 T December 20X9.
Sanderstead Co Croydon Co

Revenue 600,000 300,000

Cost of sales (400,000) (200,000)
Gross prof¡t 200, 000 00,000

During the year Sanderstead Co sold goods to Croydon Co for $20,000, making a profit of $5,000.
These goods were all sold by Croydon Co before the year end.
What are the amounts for total revenue and gross profit in the consolidated income
statement of Sanderstead Co for the year ended 31 December 20X9?
Pevenue Gross profit
A $900,000 $300,000
B $900,000 $295,000
C $880,000 $300,000
$880,000 $295,000
12 marks)

485
 98 Z has a current ratio of T . 5, a quick ratio of 0.4 and a positive cash balance. If it purchases
inventory on credit, what is the effect on these ratios?

Current ratio Quick ratio

A Decrease Decrease
B Decrease Increase
C Increase Decrease
D Increase Increase

(2 marks)
99 HJ has an asset turnover of 2.0 and an operating profit margin of 10%. The entity is about
to launch a new product which is expected to generate additional sales of $1.6 million
and additional profit of $t20,000 in its first year. To manufacture the new product HJ
will need to purchase additional assets of $500,000.
Assuming that the current operations continue to produce the same level of results, what
will be the effect of the new product on the following ratios of HJ?
Operatin$ profit rnaîgin Peturn on capitol employed
A Decrease Decrease
B Decrease Increase
c Increase Decrease
D Increase Increase
(2 marks)
100 A company’s current ratio increased from 0.7 at 3 l October 20X7 to I .5 at 3 1 October 20X8.
The company sells goods at a markup of 25% on cost.
Which of the following statements concerning this increase is/are correct?
(I) The increase in the current ratio could indicate that the company is tess likely to be
able to pay its debts on time.
(2) The increase in the current ratio could have been caused by an increase in
revenue generated by increased credit sales prices, while supplier costs remained
the same.
(3) The increase in the current ratio could have been caused by an increase in costs
charged by suppliers, while the selling price of goods remained the same.
A I only
B 2 only
C 2 and 3 only
D I and 8 only
(2 marks)

486
 EXAM ANSWER BANK

1 C A sole trader also invests capital in his or her business.

2 C The board of directors are responsible for the preparation of financial statements. Even
though the financial statements may be physically prepared by the finance department,
the board of directors still has responsibility for them. The auditors are not responsible
for the financials statements, they are responsible for the annual audit and producing an
audit report.
G B A company has a separate legal identity to its owners. Unless the partners have formed a
limited liability partnership, the partners are jointly liable for the debts of the
business.
4 D
1 and 3 are advantages of trading as a limited liability company. Publishing annual
financial statements and the requirement for an audit are disadvantages of trading as a
limited liability company.
5 B
A director's main aim should be to create wealth for the shareholders of the company. The
shareholders are the owners of the company and the directors are managing the affairs of
the company on their behalf. This can lead to a conflict of interest and short-termism
where the directors put their own interests (ie short term profits and earning bonuses)
ahead of the interests of the shareholders. Every company should consider its
contribution to society, this is known as corporate social responsibility, however this is
not the main aim of a director.
6 B
The IASB is responsible for developing and issuing IFRSs. An objective of the IFRS
Foundation is to take account of the financial reporting needs of small and medium sized
entities. The IFRS Advisory Council provides a forum for the IASB to consult with the
national accounting standard setters, academics and other interested parties.
7 C
The IASB is responsible for deveioping and issuing |FRSs.
8 A
Comparability is a separate qualitative characteristic in its own right. Accruals and going
concern are the underlying assumptions of financial statements.
9 D
Information is material if its omission or misstatement could affect the decisions of the
users of accounts. The substance over form convention means that transactions are
accounted for in accordance with their substance and not merely their legal form.
10 D
The underlying assumptions are accruals and going concern. Relevance and prudence are
qualitative characteristics.
11 B
12 B Under the imprest system, a reimbursement is made of the amount of the vouchers (or
payments made) for the period.
13 B A remittance advi¢e gives details of the invoices covered by the payment.
14 A Supplier statements are statements sent out by suppliers listing all the transactions on a
customer’s account. Petty cash vouchers are vouchers issued in the petty cash
imprest system for payments made from petty cash.
15 C
Credit notes received from suppliers are recorded in the purchase returns day book.
16 A
17 B
A is incorrect as the debits and credits don’t e9uaI each other, C is incorrect as the
debits and credits are the wrong way round and D is incorrect as the debits and
credits are the wrong way round and the credit sale has been ignored.
18 C You are recording the transaction in Cheddar's book— Cheddar is the seller, so the
s double entry is Dr receivables, Cr sales $500.
19 A
A credit increases a liability, increases income or decreases an asset.
20 8
The account has a debit balance.
21 A
A debit balance brought down on the Cash T-account represents an asset.
 487
22 A Balance carried down from previous period shows debits exceed credits and so it is a debit balance
brought down for the new period.
23 C Balance carried down from previous period shows credits exceed debits and so it is a credit balance
brought down for the new period.
24 B
TRADE RECEIVABLES ACCOUNT

Balance b/d
100,750 Cash at bank 250,225
Sales \2/, Balance c/d I 75,535
425,760 425,760
25 B
False. Sales tax for a registered trader is removed from income and expenses.
26 A
Sales tax can only be charged and reclaimed by businesses if they are registered for Sales tax. If a
business is not registered for sales tax, the sales tax incurred on purchases will be charged to the
income statement as an expense.
27 A

SALES TAX CONTROL ACCOUNT

Payables (6,750 — 1,250) Balance 5,500 Receivables 8,000
c/d (owed to tax authorities) 2,500

8,000 8,000
Balance b/d 2,550
28 D The entries required are DR Receivables 81,056
CR Sales $880
CR Sales tax $176
Michael is registered for sales tax, so the he can charge sales tax and recover the balance
from the tax authorities.
29 D Carriage outwards is a selling expense. (450@80)
30 C (450@69)- 867,050
A is incorrect as it does not include the inventory on hand at the beginning of the period. B is
incorrect as it uses the average cost method. D is incorrect as it uses the LINO method.
According to FIFO, the first items of inventory to be sold would be included as expenses in the Income
3I B Statement at the cost of the first items purchased. This cost will be lower than the average over the
whole period (because of rising prices), so the expense in the Income Statement will be lower than
average and profit will be higher.
Likewise closing inventory value: as prices are rising, the items still left in inventory will be valued at the
higher, later price, which means that inventory value will be higher than the average value in the
period.
2 @ $3.00 + 10 @ $3.50 = $41.00
32 D
 EXAM ANS W ER BA NK

33 C
Units An//’ cost’ Total Average

Opening inventory 30 2 60
5 August purchase 50 2.40 120
80 t80 2.25
10 August issue f40) 2.25 (90)
40 90
18 August purchase 60 2.50 1 50
100 240 2.40
23 August issue (25) 2.40 (60)
75 t80

34 A
35 B 1,000,000/40 years = 25,000; 1,000,000 — (800,000 — (800,000 x 2% x 10 years))
= 360,000
36 A If disposal proceeds were $15,000 and profit on disposal is $5,000, then carrying value
must be $ T 0,000, the difference between the asset register figure and the non-
current asset account in the nominal ledger.
37 D Non current assets will be understated, leading to a lower net assets position.
Additionally too much will have been charged in the income statement resulting in an
understatement of profit.
38 C Repair and maintenance of machinery is revenue expenditure. The cost of installing new
machinery can be added to the cost of the machine and capitalised, hence it is
capital expenditure. An extension to a factory building is capital expenditure as it
enhances the existing factory.
39 C
Charge for
year
Trucks dt 1 hon %000 $'000
COSt (240 - 60) 180,000
Acc dep'n (I 1 5— (60 - 20) 75,000
Carrying vaiue 105,000
Dep’n charge @ 20% 21,000 21,000
Purchased truck
Dep’n charge @ 20% 160 @ 20% 32,000 32,000
53,000
40 B There is no requirement that development expenditure should be amortised over a
period not exceeding five years.
41 D The development expenditure should be capitalised and amortised over 25 years,
giving the statement of financial position balance as 500,000 — 500,000/25
$480,000, and
820,000 charged to the income statement.
The research expenditure should be charged to the income statement in full, therefore the
total charge to the income statement is $420,000.
42 D
Amortisation for the year = $1,000,000* x 5% = $50,000.
* Cost — carrying value ($950,000) + accumulated amortisation ($50,000)
43 B
The prepayment will add 52, 00 to profit and net assets.
The accrual will reduce profit and net assets by $800.
The net effect will be to increase both by $1,300.
44 A
(T 20,000 x 7/1 2) + (T 44,000 x 5/1 2) = t30,000; Rent is payable in advance,
therefore the rent for October has been prepaid at 30 September 20X8: t44,000 x
1/1 2
1 2,000
 489
45 B RENT RECEIVABLE

Balance b/d 53,000 Balance b/d 71,750

Income statement t,t89,750 Cash received 1,203,000
Balance c/d 78,000 Balance c/d 46,000
1,320,750 T,320,750
46 A Prepaid expenses are not included in the income statement for the current period as they
do not relate to that period. The expenses are instead shown in the period to which they
relate, in accordance with the accruals concept.
47 B 37,000 + ((5t 7,000 37,000) x 5%) - 39,000) - 22,000. New allowance required
is $24,000, so the allowance is reduced by $I 5,000.
48 D Neither statement is true.
An aged receivables analysis is a report used to helo the business monitor its
receivables balances and identify which receivables balances are overdue. A credit limit
is the maximum amount a customer can owe to a business at any one time, If an order
is placed by a customer that would take the customer’s account over its credit limit, the
order will not be filled until a payment is received to reduce the balance on the customer’s
account.
49 B

Receivables balance before adjustments 456,330.0

Less irrecoverable debts written off (780.0)
455,550.0
Receivables allowance $455,550 @ 5% (22,777.5)
Receivables balance for statement of financial 432,772.5
position

50 B
Irrecoverable debts expense $
Increase in allowance (22,777.5 — t5,255) 7,522.5
Add irrecoverable debts written off 7800
8,302 5
Less cash recovered from previously written off (450.0)
debt Irrecoverable debt expense 7,852.5
51 B
52 B Booker should include disclose a contingent liability in the financial statements because
the amount can not be reliably estimated. If the amount could be reliably estimated, then
a provision would be recognised.
53 D As the likelihood of paying any cash to Space Co for the claim is remote, there is nothing
to disclose in the accounts regarding this claim. A provision should be created for the
warranties as the conditions for recognising a provision are me—t present obligation,
probably outflow of cash, reliable estimate of amount.
54 C The 20X3 provision is calculated using expected cost:
(80% x 0) (12% x 545,000) (8% x 800,000) - $129,400
The increase in the provision is therefore 1Z9,400 — 99,750 - 829,650. This is a debit
to the income statement.
55 B PAYABLES LEDGER CONTROL ACCOUNT

Cash paid 222,340 Opening balance 308,600

Discounts received 4,900 Credit purchases 337,200
Contras against credit balance in 1,400 Interest payable on overdue 3,600
receivable ledger amount
Closing balance 420,760 s
649,400 649,400

490
 EXAM ANSWER BAN K

56 B Because the credit note was not entered in the sales day book, it would not be included
in the total that is entered into the receivables control account. Therefore the total of the
list of balances would be $t50 less than the receivables control account balance. The
invoice entered incorrectly in the sales day book would cause both the list of
balances and the receivables control account to be overstated by $90.
Discounts allowed relate to sales and are an expense of the
58 C
business (t2, t60 + 1,800 — 150) — (t4,560) — 750
59 A
$
List Price 200,000
Trade discount (20,000)
I 80,000

60 B
3,860 — 9,160 + 16,690 — 3,670. Remember that the opening bank balance iF'
overdrawn.
6;
Items 2 to 4 are adjustments to the bank balance per the statement.
B Outstanding lodgements and unpresented cheques are timing differences.
62 B The ledger balance of $540 credit should be adjusted by a credit entry of $28 for bank
charges. Therefore the corrected ledger balance is 8568 credit. The bank statement
63 C balance is then $(568) + $620 cheques not yet on bank statement, ie $52 cash at ban k.

64 B SUSPENSEACCOUNT

65 A

Balance b/d 210 Gas bill (420 240) 180

Interest 70 Discount (2 x 50) 100
280 280
66 B
67 B The inventory account is only changed at the end of the accounting
period.
68 A Remember the business equation: P = I D — C,
69 D (3 T8,000 412,000 — 214,000—) (6t2,000 x 75%) = 57,000
70 D
Total Ordinary Sales to
sales sales Harry

Cost of sales
Mark-up:
342,000 334,700 7,300
t0% on cost 730 730
20% on sales (= 25% on 83,675 83,675
cost)
Sales 426,405
71 B
418,375
Non-current assets
Inventory Receivables

Less Payables
Overdraft Rent
accrual

Closing capital 3,
99
4
3,
53
7
500 8,030 64635

5I ,300
7,770 8,03 I)
5,565 56,604 491

72 B Purchases were payments made plus increase in suppliers' balances ie

$141,324 + ($16,812 — $ T 5,264)- $142,872

Thus cost of sales Opening inventory 6,359

Purchases 142,872
149,23t
Less closing inventory (4,91
9) 144,312
73 B Dividends appear in the SOCIE.
74 D
75 C
Dividends are not included the statement of changes in equity until they are declared.
76 B
Number of shares — 45,000/0.5 90,000
Number of bonus shares issued = 90,000/3 x 2 = 60,000
Nominal value of bonus shares issued - 60,000 x 0.5 = 30,000
Therefore: Share capital = 45 + 30 = $75,000
Share premium - 60— 30 = 830,000
77 A IAS 1 does requires that some items must appear on the face of the statement of financial
position, however, it allows companies to choose whether they present a combined
statement of comprehensive income or separate income statement and statement of other
comprehensive income.
78 C Gains on property revaluations are shown in the ‘other comprehensive income’ section of the
statement of comprehensive income. They are also shown in the statement of changes in
equity as the movement on the revaluation surplus. Dividends paid and a bonus issue of
shares are shown in the statement of changes in equity.
79 B There is no requirement in IAS 16 for the directors to disclose how certain they are that
the valuation won't change in the next 5 years.
80 A The overdraft is a current liability and must not be deducted from any cash balances, the
bank loan is a non-current liability as it is not due for payment for more than 1 2 months from
the reporting date.
81 B
82 A The fraud is an adjusting event as it took place during the year to 30 June although it was
not discovered until after the year end. The loan stock issue is a non-adjusting event but
due to its materiality should be disclosed in the notes.
83 A (1) is an adjusting event as it provides evidence of a condition that existed at the
reporting date — ie that the customer’s debt was irrecoverable. The debt should be written
off, and therefore net profit is reduced by $t50,000. (2) is non-adjusting as it does not
affect the situation at the reporting date and therefore has no impact on profit at the
reporting date. This event should simply be disclosed in the financial statements.
84 B
85 D Items (1) and (3) do not involve movements of cash.
86 B An increase in a bank loan will be classified under financing cash flows. A loss on the sale
of a non-current asset will be added back to net profit to calculate operating cash flows
using the indirect method.
87 B Both investments are subsidiaries. In (I), Barracuda has more than 50% of the voting
rights as it owns more than 50% of the ordinary shares. In (2), Barracuda has the ability
to control Major as it can appoint more than half of the board of directors of Major Inc.
492
 EXAM ANSWER BAN K

88 D None of the statements are correct. A 50% investment will usually mean that an
investment is a subsidiary, however, if it can be shown that the investor does not have
control over the investee company, it will not be classified as a subsidiary.
Consolidated accounts are prepared to represent the substance and not the legal
form of the relationship between parent and subsidiary. An associate is an entity in which
an investor has significant influence.
89 C Delta's share of profit after tax should be included as a single amount in the consolidated
income statement.
90 C
Current assets (250 + 100 — 6) 344
91 C
%000
Consideration transferred 300
Fair value of non-controlling interest at acquisition 100
400
Less' Net assets acquired (200 36) (236)
164
92 C
$'ooO
Consideration transferred 500
Fair value of non-controlling interest 125
625
Less: Net assets acquired f450)
175
93 B
%000
Vaynor Co 90
Weeton Co (40+ IO) 50
Yarlet Co (70-30) 40
1 80

94 B
$'o0o
Spring 200,000
Summer 160,000
360,000
Less: intragroup sales ns,ooo)
Add: provision for unrealised profit (t6,000 — 10,000) 6,000
350,000
95 D Reduce revenue by intra-group sales of $40,000.

96 A Reduce consolidated profit by provision for unrealised profit.

25
20,000 x = $4,000
125
97
Sanderstead Croydon Adj
C

Revenue 600, 000 300,000 (20,000) 880,000

Cost of sales (400,000) (200,000) 20,000 (580,000)
Gross profit 300,000

493
 98 A Example: suppose the entity purchases inventory worth $300,000:
Current ratio Quick ratio

Before
I, 000 1,000
1,800 400
After = 1.4
1,300 1,300= 0.3
99 B Calculate the Fatios felating to the new product:
120
Operating profit margin:
1,600 = 7.5% (less than existing margin of I 0%)

ROCE: = 24% (greater than existing ROCE of 20%)

Existing ROCE is t0% x 2 - 20%.

t00 B Current ratio = current assets/current liabilities. If the ratio is less than one, it could
mean that the company is unable to pay its debts on time.
Therefore (I) is incorrect, because the ratio has gone up and is now above one, it
means the Company is more likely to be able to pay its debts on time compared to
before when the ratio was less than one. (2) is correct as an increase in revenue caused
by an increase in price (as opposed to a change in volume) will lead to a larger
receivables balance, hence a larger current assets balance compared to current
liabilities. (3) is incorrect as a higher supolier costs will result in a larger current liabilities
balance, while current assets remain the same.

494